Although the Internet reduces market frictions by making it easier for consumers to obtain information about prices and product offerings, goods sold by electronic firms are not perfect substitutes for otherwise identical goods sold by conventional stores. Online purchases, due to non-zero shipping time, are associated with waiting costs, and they do not allow consumers to inspect the product prior to purchase. Visiting a conventional store, on the other hand, involves positive travelling costs. A model extending the circular city paradigm with two types of firms, conventional and electronic, is studied. Under the benchmark setting with only conventional firms in the market, each consumer visits the nearest store and purchases the product there. When electronic firms enter the market, an intriguing type of market segmentation may arise. First, each consumer travels to the nearest conventional store to "try on" the product. Second, conventional retailers increase their prices and sell the good only to consumers who discover that they have high valuations; consumers with low valuations return "home" and order the good online. In spite of the increased competition from Internet retailers, welfare decreases.
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Paper provided by Department of Economics, University of Missouri in its series Working Papers with number
0715.
Find related papers by JEL classification: D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
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